Ch 10

To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is: -Stamped "paid" by the check signer. -Approved for authorized purchases. -Prenumbered and accounted for. -Supported by a vendor's invoice.

Stamped "paid" by the check signer.

Obtain bank cutoff statements.

Verify reconciling items on the year-end bank reconciliation.

Balance per books

Compare to 9/30/X5 general ledger.

Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be: -The chief operating officer. -An investment committee of the board of directors. -The treasurer. -The corporate controller.

An investment committee of the board of directors.

The entity borrowed funds from a financial institution. Although the transaction was properly recorded, the auditor suspects that the loan created a lien on the entity's real estate that is not disclosed in its financial statements. (Select only 1 procedure.)

Confirm the terms of borrowing arrangements with the lender.

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: -General ledger. -Cutoff bank statement. -Bank confirmation. -Year-end bank statement.

General ledger

Search for large checks to directors, officers, and employees.

Identify related party transactions.

Customer note collected by bank

Inspect bank credit memo.

Error with check

Inspect bank credit memo. Trace items on the bank reconciliation to cutoff statement.

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: -Reviews the monthly bank reconciliation. -Returns the checks to accounts payable. -Is denied access to the supporting documents. -Is responsible for mailing the checks.

Is responsible for mailing the checks.

The auditor suspects that the entity's controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity's books. (Select only 2 procedures.)

Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

Outstanding checks

Trace to cash disbursements journal. Ascertain reason for unusual delay. Inspect supporting documents for reconciling item not appearing on cutoff statement. Trace items on the bank reconciliation to cutoff statement. Trace items on the cutoff statement to bank reconciliation.

The best way to verify the amounts of dividend revenue received during the year is: -Examination of cash disbursements records. -Verification by reference to dividend record books. -Confirmation with dividend-paying companies. -Recomputation.

Verification by reference to dividend record books.

The auditor suspects that selected employees of the entity received unauthorized raises from the entity's payroll supervisor, who has access to payroll records. (Select only 1 procedure.)

Vouch data in the payroll register to documented authorized pay rates in the human resources department's files.

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? -A bank lockbox system. -Prenumbered remittance advices. -Monthly bank reconciliations. -Daily deposit of cash receipts.

A bank lockbox system.

The auditors who physically examine securities should insist that a client representative be present in order to: -Coordinate the return of securities to the proper locations. -Lend authority to the auditors' directives. -Acknowledge the receipt of securities returned. -Detect fraudulent securities.

Acknowledge the receipt of securities returned.

The entity's cash receipts of the first few days of the subsequent year were properly deposited in its general operating account after the year-end. However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit. (Select only 1 procedure.)

Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips.

The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days. (Select only 2 procedures.)

Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips. Send requests to confirm the entity's accounts receivable on a surprise basis at an interim date.

Items a through f represent the items that an auditor ordinarily would find on a client-prepared bank reconciliation. The accompanying List of Auditing Procedures represents substantive auditing procedures. For each item, select one or more procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. The procedures on the list may be selected once, more than once, or not at all. Assume The client prepared the bank reconciliation on 10/2/X5. The bank reconciliation is mathematically accurate. The auditor received a cutoff bank statement dated 10/7/X5 directly from the bank on 10/11/X5. The 9/30/X5 deposit in transit—outstanding checks #1281, #1285, #1289, and #1292—and the correction of the error regarding check #1282 appeared on the cutoff bank statement. The auditor assessed control risk concerning the financial statement assertions related to cash at the maximum. Balance per bank

Confirm directly with bank. Trace items on the bank reconciliation to cutoff statement

You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: -Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. -Coordinate the count of cash with the cutoff of accounts payable. -Coordinate the count of cash with the count of marketable securities and other negotiable assets. -Count the cash immediately upon the return of the confirmation letters from the financial institution.

Coordinate the count of cash with the count of marketable securities and other negotiable assets.

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the: -Individual bank deposit slips with the details of the monthly bank statements. -Details of bank deposit slips with details of credits to customer accounts. -Daily cash summaries with the sums of the cash receipts journal entries. -Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.

Details of bank deposit slips with details of credits to customer accounts.

Auditors perform a number of procedures relating to cash—some unique, some not unique. For each substantive procedure below, identify its primary objective or indicate that the procedure serves no purpose. Prepare a bank transfer schedule.

Detect kitting

The auditor suspects that vouchers were prepared and processed by an accounting department employee for merchandise that was neither ordered nor received by the entity. (Select only 1 procedure.)

Examine the supporting purchase orders and receiving reports for selected paid vouchers.

he auditor suspects that fictitious employees have been placed on the payroll by the entity's payroll supervisor, who has access to payroll records and to the paychecks. (Select only 1 procedure.)

Observe payroll check distribution on a surprise basis.

Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? -Observe the consistency of the employees' use of cash registers and tapes. -Inquire about employees' access to recorded but undeposited cash. -Trace deposits in the cash receipts journal to the cash balance in the general ledger. -Compare the cash balance in the general ledger with the bank confirmation request.

Observe the consistency of the employees' use of cash registers and tapes.

An auditor suspects that the controller wrote several checks and recorded the cash disbursements just before year-end but did not mail the checks until after the first week of the subsequent year. (Select only 1 procedure.)

Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation.

Items a through l represent possible errors and fraud that you suspect may be present at Rex Company. The accompanying List of Auditing Procedures represents procedures that the auditor would consider performing to gather evidence concerning possible errors and fraud. For each item, select one or two procedures, as indicated, that the auditor most likely would perform to gather evidence in support of that item. The procedures on the list may be selected once, more than once, or not at all. The auditor suspects that a kiting scheme exists because an accounting department employee who can issue and record checks seems to be leading an unusually luxurious lifestyle. (Select only 1 procedure.)

Prepare a bank transfer schedule.

The auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a check on one account and not recording it as an outstanding check on that account and simultaneously recording it as a deposit in a second account. (Select only 1 procedure.)

Prepare a bank transfer schedule.

Reconciliation of the bank account should not be performed by an individual who also: -Processes cash disbursements. -Has custody of securities. -Prepares the cash budget. -Reviews inventory reports.

Processes cash disbursements.

Prepare a four-column proof of cash.

Reconcile cash receipt and disbursement totals between company records and bank records.

In order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities? -Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent. -Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. -Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. -Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept.

Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

The details of invoices for equipment repairs were not clearly identified or explained to the accounting department employees. The auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets. (Select only 1 procedure.)

Scan the debits to the fixed asset accounts and vouch selected amounts to vendors' invoices and management's authorization.

The auditor discovered an unusually large receivable from one of the entity's new customers. The auditor suspects that the receivable may be fictitious because the auditor has never heard of the customer and because the auditor's initial attempt to confirm the receivable has been ignored by the customer. (Select only 2 procedures.)

Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

Deposits in transit

Trace to cash receipts journal. Ascertain reason for unusual delay. Inspect supporting documents for reconciling item not appearing on cutoff statement. Trace items on the bank reconciliation to cutoff statement. Trace items on the cutoff statement to bank reconciliation.

Use a standard confirmation form to confirm account balance information.

Verify year-end cash and liability balance information.